What Makes Low Down Payment Loans Possible?
Simply put, mortgage insurance protects the mortgage company
against financial loss if a homeowner stops making mortgage
payments. Mortgage companies usually require insurance on low
down payment loans for protection in the event that the homeowner
fails to make his or her payments. When a homeowner fails to
make the mortgage payments, a default occurs and the home goes
into foreclosure. Both the homeowner and the mortgage insurer
lose in a foreclosure. The homeowner loses the house and all
of the money put into it. The mortgage insurer will then have
to pay the mortgage company's claim on the defaulted loan.
For this reason, it is crucial that the family buying the
home can really afford it, not only at the time it is purchased,
but throughout the time period of the loan.
Although the cost of the mortgage insurance
is paid by the home buyer, or borrower, the mortgage insurer
works directly
with the mortgage company. Mortgage insurance is available
to commercial banks, savings & loans and mortgage bankers,
all of whom offer mortgage loans to home buyers.
Remember that mortgage insurance is not the same as credit
life insurance, also called mortgage life insurance. This type
of policy repays an outstanding mortgage balance upon the death
of the person who took out the insurance policy.
The Secondary Market
The mortgage company's decision to use mortgage insurance
is driven by the requirements of investors in the mortgage
market. Because of the losses that could occur, major investors
require mortgage insurance on all loans made with low down
payments.
The three primary investors in home loans are Federal National
Mortgage Association (Fannie Mae), Federal Home Loan Mortgage
Corporation (Freddie Mac) and Government National Mortgage
Association (Ginnie Mae). By purchasing and selling residential
mortgages, Fannie Mae and Freddie Mac help keep money available
for homes across the country.
Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually
buy mortgages. It adds the guarantee of the full faith and
credit of the U.S. Government to mortgage securities issued
by mortgage companies.
The Two Choices: Government Insurance and Private Insurance
Now that we have explained how mortgage insurance works and
why it is necessary, let's look at the basic kinds of mortgage
insurance. Low down payment mortgages can be insured in two
ways -- through the government or through the private sector.
Mortgages backed by the government are insured by the Federal
Housing Administration (FHA), the Department of Veterans Affairs
(VA) or the Farmers Home Administration (FmHA).
Although anyone can apply for FHA insurance, the other two
government mortgage guarantee programs are much more targeted.
The VA program is limited to qualified, eligible veterans and
reservists. This program is very specialized, so contact your
mortgage professional for the details. The FmHA insures loans
for the construction and purchase of homes in rural communities.
Obtaining conventional financing is the alternative to obtaining
a home loan backed by the government. Conventional mortgages
are all home loans not guaranteed by the government, including
those guaranteed by private mortgage insurers.
Although government and private insurance are based on the
same concept of allowing families to get into homes with less
cash down, there are many differences between the two. Often,
your mortgage professional will play an important role in suggesting
and deciding which insurance is selected.
Home buyers must make a down payment of at least 5% of a home's
value to be considered for private mortgage insurance. However,
under some special programs, the down payment requirement allows
the buyer to use a gift or grant to cover 2% of the 5% down
payment required by private mortgage insurers. The gift or
grant may come from a friend, relative, community group or
other organization.
Private mortgage insurance is available on a wide variety
of home loans and there is no pre-set limit on the loan amount.
Although differences such as these may affect whether the mortgage
company prefers to work with government or conventional mortgages,
your mortgage professional will discuss which one would be
better for your situation.
With the wide variety of loans available, home buyers have
the freedom to choose the type of loan that best suits their
needs. Early on in the home buying process, it is a good idea
to meet with several companies to compare the types of mortgages
they offer and shop for the best price and terms. Best of all,
working with a mortgage insurer can be very easy, whether your
loan is insured by the FHA or a private mortgage insurance
company, because your mortgage professional handles all of
the arrangements.
By making lending money to home buyers safer, mortgage insurance
helps more families get into homes of their own.
Apply today to
let Bancplus Home Mortgage Center help you get the great
financing you want
and deserve!
